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CHART ANALYSIS

Watch The NYSE Market Leader

09/27/05 01:10:54 PM
by Gary Grosschadl

The NYSE has been very strong, but now it's a hold at best until it corrects.

Security:   $NYA
Position:   Hold

Over a two-year period, the New York Stock Exchange (NYSE) has soundly beaten the other major averages (the Dow Jones Industrial Average, the NASDAQ, and the Standard & Poor's 500).

The two-year gains for the NYSE are ~ 33%, as compared to 22% for the S&P 500, 18% for the NASDAQ, and 12% for the DJIA. With that in mind, I look for insights concerning this weekly two-year chart.

First, this index is in an obvious uptrend with great support from its 50-period moving average and robustly above its ever-important 200-period moving average (MA). However, my favorite harbinger of impending correction is waving a red flag. Whenever I see multiple negative divergences on several favored indicators, I sense a coming correction.

FIGURE 1: NEW YORK STOCK EXCHANGE COMPOSITE INDEX. A two-year weekly chart of a market leading index.
Graphic provided by: StockCharts.com.
 
The directional movement indicator at the top of Figure 1 shows the average directional movement index (ADX) possibly peaking and above the +DI (positive directional indicator), while both +DI and -DI (negative directional indicator) are converging. That is bearish, as trend strength and bullish force are beginning to wane. Looking at the slope of the +DI trendline, a negative divergence to market direction is evident. Similarily, the lower indicators also show negative divergences via the MACD (moving average convergence/divergence), RSI (relative strength index), and CMF (Chaikin money flow indicator).


Despite my misgivings, the uptrend remains intact until price action breaks down. Note the strong support the past four months from the 20-day exponential moving average (EMA). A close below this mark (currently 7403) could be the first warning of a bigger correction. When this occurs, another challenge of the 50-day EMA (currently 7166) is very likely. Should this support not hold, then two lower support levels are indicated at the support zone from 6800 to 6900 and then possibly an important test of the 200-period EMA currently near 6500.

In summary, as long as the NYSE remains above its 20- and 50-period EMAs, this strong uptrend is intact. However, several indicators do hint at a coming correction, or at least a support test. A stochastic upturn from the 20 level could signal that the bulls are ready to challenge new highs after a support test.


Gary Grosschadl

Independent Canadian equities trader and technical analyst based in Peterborough
Ontario, Canada.

Website: www.whatsonsale.ca/financial.html
E-mail address: gwg7@sympatico.ca

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